Economist and stock market bear David Rosenberg has been highlighting the fact that economic weakness often coincides with presidential cycles.
A closer look reveals that the economy and job creation have slowed or sputtered in three of the past four presidential cycles when one party controlled the White House and the other controlled Congress "” 1992, 2000 and 2008.
Could 2012 provide a repeat? Although Congress is split, government is essentially divided; Republican control of the House and the difficulty of overcoming the 60-vote filibuster in the Senate have effectively stopped President Obama's agenda in its tracks. Bipartisan agreement is conceivable, but will become more difficult as 2012 approaches.
First, it's worth mentioning that divided government does not appear to have been a particularly relevant factor in the economic weakness in 2000 and 2008 triggered by the popping of the dot-com and housing bubbles. (The economy slowed in the second half of 2000, but the actual recession didn't begin until 2001.)
In 1990, a number of factors conspired to tip the economy into recession, including the buildup to the Gulf War and associated increase in oil prices. But the tax-hiking budget deal between President George H.W. Bush and the Democratic Congress "” signed in late 1990 when the economy was already contracting "” may have played some role in 1991's subpar recovery.
The best piece of evidence that divided government may contribute to economic head winds in presidential cycles comes from a counterfactual example "” the 2004 cycle. With recovery from the 2001 recession flagging in late 2002 and early 2003, and President George W. Bush determined to avoid the same one-term fate as his father, a GOP Congress helped him apply the fiscal accelerator. The 2003 Jobs and Growth Tax Relief Reconciliation Act cut the top rate on long-term capital gains and dividends to 15% and moved forward marginal rate reductions scheduled for 2006 "” retroactively to the start of 2003.
One imperfect way of looking for a political impact on the economy in a presidential cycle is to see the extent to which the budget deficit (or surplus) grew or shrank as a share of the economy in the two years prior to the election. It makes sense to separate out the role of automatic fiscal stabilizers, which don't involve action by Congress. (Fortunately, CBO does just that on page 145.)
From fiscal 2002 to fiscal 2004, the deficit grew by 2% of GDP, absent fiscal stabilizers.
In the prior four presidential cycles, all with divided government, the adjusted deficit shrank by an average of 1%.
The discussion is relevant with policy set to tighten as the GOP pushes for swift and aggressive cuts to the discretionary budget.
Republicans are surely being driven by a big-picture ideology that believes in low taxes and smaller government which require lower spending. Have they considered that tapping the fiscal brakes would slow the rebound in the short term, meaning on Obama's watch? After all, one person's government service or subsidy is another person's business income. But if you go by the words of Republicans, they simply reject the idea that less government will mean fewer jobs, believing that spending cuts will immediately ease uncertainty about future tax levels.
The biggest factor behind tightening fiscal policy into 2012 is likely to be the tax-cut deal that Obama embraced late last year. Expiration of a one-year payroll tax holiday will reverse $111 billion in fiscal stimulus starting Jan. 1, unless it is extended.
That payroll tax replaced Obama's Making Work Pay tax credit, but families who don't pay taxes are still expected to net $18 billion during this tax filing season.
On top of that combined $129 billion tightening will be the likely expiration of extended jobless benefits. The 13-month extension approved late last year had a price tag of $56 billion. One would hope that far fewer people will be joining the ranks of the long-term unemployed, so it's hard to know how much that expiration will tighten policy.
In addition, a provision allowing businesses to write off 100% of qualifying capital investments only lasts through 2011, after which they will be able to write off 50%.
And all this is before the discretionary cuts demanded by the GOP and the cuts that will be made at the state and local level in the budget year starting July.
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